Auditor’s remuneration
Auditing denotes the procedure of investigating and assessing the financial reports published by the organisations in order to verify that these reports are free from financial frauds, material misstatements, errors and others. Thus, the auditors are required to improve audit report quality through revelation of the material-related information pertaining to the financial statements (Becker, Stead and Stead 2016). Besides, they need to provide such information to the stakeholders in a language, which would be easy for understanding. In the current era, the audit committees have taken various initiatives for improving audit report quality. Therefore, it is necessary for the auditors to consider enhanced issues in the financial statements that would help in ensuring better audit quality. The current report would emphasise on the latest annual report of Wesfarmers Limited associated with numerous audit aspects of the financial reports. Therefore, it is noteworthy to mention that the organisation has Ernst & Young as its audit partner.
Before providing audit services, all the auditing firms need to conform to the necessary guidelines and norms related to auditor independence. In other words, it could be stated that the auditors need not be associated with the audit client when they provide audit operations (Louwers et al. 2015). As evident from the directors’ report section of the annual report of Wesfarmers in 2018, Ernst & Young did not have convention of the auditor independence requirements, in compliance with the Corporations Act 2001, while providing audit operations. The directors of the organisation have stated that Ernst & Young has adhered to all the necessary professional principles and guidelines of the auditing standards. Some of the principles include adhering to the guidelines of ‘’Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants’’ and “Corporations Act 2001”. These are followed so that the auditor independence could be maintained properly (Bédard and Courteau 2015).
Based on the annual report of Wesfarmers in 2018, Ernst & Young has offered two types of non-audit services to the organisation. These services primarily include tax compliance service and other services. For tax compliance service, the auditor has received $683,000 and for other services, $343,000 has been paid to the auditor. Therefore, the total amount of non-audit service fees rendered by Wesfarmers has been $1,026,000 in 2018 and it has been 12.01% of the overall audit fees incurred in the year 2018 (Wesfarmers.com.au 2018). However, Wesfarmers has ensured the necessary compliance for Ernst & Young with all the necessary standards at the time of obtaining the non-audit services. This implies that the auditor has not compromised its independence, as per the regulations mentioned in Corporations Act 2001. Besides this, Wesfarmers has not provided the auditor with any kind of work that involves the review of work of the auditor itself in order to undertake management decisions. Moreover, the various corporate governance norms and guidelines are followed while providing non-audit services. Finally, all these aspects imply the independence of the auditor (Bradbury, Raftery and Scott 2018).
Key Audit Matters
The above table helps in identifying that the audit service payments take into account the Australian as well as cross-border network firms. The non-audit services provided include tax compliance service and other services. As identified from the above table, Wesfarmers has minimised the audit service payment to Ernst & Young by 5.05% in 2018 compared to the last year. Moreover, the similar trend is observed in case of non-audit services, as the payment to Ernst & Young for these services has been minimised by 55.53% in 2018 in comparison to the previous year. This denotes that Wesfarmers has obtained lower audit and non-audit services in the current year. Due to such reduction, the total payment made to the auditor has fallen by 16.44% in 2018 compared to the past year.
According to the auditors’ opinion, key audit matters are termed as the significant aspects during the time of auditing the financial statements (Carey 2015). As per the 2018 annual report of Wesfarmers, four key audit matters could be identified. These matters are described with suitable audit procedures for minimisation and classification:
As per the auditor, it is required for Wesfarmers to ascertain the recoverable amount of property, plant and equipment, goodwill and intangible assets in the light of significant judgement. The auditors have observed the fact that Target has a recoverable amount more than the carrying amount. Hence, it would result in impairment of the cash generating unit of Target (Stewart, Kent and Routledge 2015). For dealing with this matter, the auditor has assessed the assumptions used as well as methodologies associated with the ascertainment of cash generating unit, growth rate, estimation of cash flows, discount rate, comparative industry analysis and other market evidences. Moreover, the adequacy of the financial statement in relation to impairment test, sensitivities and assumptions are used by the auditors as well. Such method could be categorised in the form of analytical procedures (Carson, Fargher and Zhang 2016).
These are the rebates that Wesfarmers has obtained from the suppliers in relation to its retail operations (Wesfarmers.com.au 2018). Supplier rebates are taken into account in the form of a key audit matter due to the supplier rebate quantum realised during the period and the judgement is needed to be exercised by considering certain factors. For dealing with this matter, Ernst & Young has undertaken audit procedures, which include the nature of the types of supplier rebates, analysing the appropriateness of organisational controls in place and performing comparisons of the different rebate agreements compared to the last year and budget. Moreover, the procedures include sample testing of the supplier rebates, evaluating the suppliers having promotional credit, examining sample related to material new contracts, inquiring legal counsel and the business representatives as well. Hence, it becomes possible to categorise such procedures as control tests, substantive detail tests along with substantive balance or analytical procedure test (Cohen and Simnett 2014).
Supplier rebates
In the year 2018, Wesfarmers has agreed to dispose the coal mine of Curragh in lieu of $700 million. This agreement takes into account a mechanism for sharing value associated with future prices of metallurgical coal. It has been identified that the organisation has realised profit after tax of $250 million from the discontinued operation of the mine. This takes into consideration the trading outcome to the effective disposal point as well as the disposal gain and this is the reason that Ernst & Young has considered it as a key audit matter. For handling this matter, the auditor has understood the purchase and sale agreements along with associated documents for evaluating the computation of the post-tax disposal gain. Secondly, it has analysed the significant inputs of post-tax sales gain calculation after which it has ascertained the derecognised asset and liability values. The next step includes the engagement of the tax specialists for consideration of the tax effects of divestment and finally, the financial statement disclosures are taken into account.
For the first half-period ended in 2018, there has been recognition of $953 million as impairment charge associated with BUKI and on 25th May 2018, Wesfarmers has divested the business in lieu of a nominal price. In its 2018 financial statements, the organisation has realised a loss of $1.66 billion from such discontinued operations and this takes into account the impairment charge realised in the initial six months of the period, the trading outcome to the effective disposal point as well as the disposal loss. This is the reason that Ernst & Young has considered it as a key audit matter for the financial year 2018.
For dealing with this key audit matter, Ernst & Young has evaluated the accuracy of impairment realised along with analysis of the methodologies and assumptions. The key inputs such as terminal growth rates, discount rates, growth rate, inflation and assumptions in commodity prices are assessed. Moreover, the auditor has understood the purchase and sale agreements along with associated documents for evaluating the computation of the post-tax disposal gain. Secondly, it has analysed the significant inputs of post-tax sales loss calculation after which it has ascertained the derecognised asset and liability values. The next step includes the engagement of the tax specialists for consideration of the tax effects of divestment and finally, the financial statement disclosures are taken into account.
The latest annual report of Wesfarmers Limited states that the management of the organisation has formed an audit and risk committee and the role of this committee is to carry out the monitoring of internal control procedures for protecting company assets while ensuring integrity in financial reporting (Griffiths 2016). This committee has two non-executive directors, which include J.A. Westacott and D.L. Smith Gander. The significant areas of focus for the committee constitute of compliance with the integrity of financial reporting, review and analysis of the influential dynamics for realising commercial incomes along with reviewing the framework necessary to conduct risk management for audit (Hardy 2014).
Discontinued operations of Bunnings UK and Ireland (BUKI)
It is evident from the independent auditor’s report of Wesfarmers Limited in 2018 that the organisation has prepared its remuneration report by conforming to the necessary guidelines mentioned in “Section 300A of the Corporations Act 2001”. Moreover, as per the opinion of Ernst & Young, the financial reports are developed and represented in such a manner that all the regulating Australian accounting standards and other norms are followed accurately by Wesfarmers. Hence, in this case, an unqualified audit opinion is issued by Ernst & Young (Zhou, Simnett and Hoang 2018).
As per the latest annual report of Wesfarmers, the responsibilities of the management and directors differ from those of the auditor. This is especially apparent while formulating and depicting the financial statements (Hay, Stewart and Botica Redmayne 2017). The management as well as the directors are required to ensure whether the financial reports are prepared for providing accurate overview of the Corporations Act 2001 and the accounting standards prevalent in Australia. Moreover, it is the accountability of the directors to evaluate the capability of the organisation to continue functioning in going concern basis while preparing the financial statements. On the other hand, the auditors have certain responsibilities that do not match with the directors and management (Iyer and Samociuk 2016).
The auditors are involved in investigating and assessing the financial reports published by the organisations in order to verify that these reports are free from financial frauds, material misstatements, errors and others (Knechel and Salterio 2016). Some other duties of the auditors include identifying and evaluating the risks associated with material misstatements, gaining adequate knowledge regarding internal control, dissecting the effectiveness of accounting policies and inferring the suitability of the going concern base of accounting used by the directors. Finally, the auditors are accountable to analyse the formation and presentation of financial statements along with receiving adequate evidences for audit (McKee 2015).
It is noteworthy to mention that two subsequent events for Wesfarmers have taken place in the year 2018. One such event has been the demerger of Coles in March 2018. However, Ernst & Young has not treated the event having material value, since it is estimated not to have any material impact on the financial statements of the organisation (Simnett and Huggins 2015). The board of directors of Wesfarmers has announced fully-franked ordinary dividend of 120 cents per share and as a result, the total amount of final dividend to be paid to the shareholders would be 223 cents per share on 27th September 2018. The dividend is yet to be provided to the shareholders.
Based on the point of view of a third party stakeholder, it is apparent that Ernst & Young has been highly efficient in analysing the material information of Wesfarmers Limited based on its latest annual report. This is because appropriate adherence has been made to the guidelines laid down in APES 110, auditing standards of Australia and Corporations Act 2001. Moreover, it could be witnessed that the auditor has disclosed four key audit matters in the annual report of Wesfarmers Limited and the audit steps have been mentioned as well for minimising their effects as well. These aspects clearly shed light on the fact that Ernst & Young has been highly efficient at the time of dealing with material information (Simnett, Carson and Vanstraelen 2016).
In accordance with the annual report of Wesfarmers Limited in 2018, it is evident that the auditor, Ernst & Young, has not failed to include any material aspects or information having material collision on the financial reporting of the organisation. All information is disclosed and explained properly by the auditor of Wesfarmers regarding the material factors that might have adverse impact on the business operations (Soh and Martinov-Bennie 2015). Therefore, it could be said that there is no partially reported, under-reported or missing material information inherent in the financial reports of Wesfarmers.
When the annual general meeting of Wesfarmers Limited would take place, numerous questions could be asked by the shareholders of the organisation. These questions are summed up as follows:
- What are the initial points from which the audit work has been started?
- How did you ascertain the materiality level in three key audit matters mentioned in the annual report of Wesfarmers?
- What is the scope of your external audit services?
- Are there any other auditors that are involved in auditing the financial reports of the organisation?
Conclusion:
It is apparent from the above evaluation that before providing audit services, all the auditing firms need to conform to the necessary guidelines and norms related to auditor independence. The latest annual report of Wesfarmers Limited states that the management of the organisation has formed an audit and risk committee and the role of this committee is to carry out the monitoring of internal control procedures for protecting company assets while ensuring integrity in financial reporting. The management as well as the directors are required to ensure whether the financial reports are prepared for providing accurate overview of the Corporations Act 2001 and the accounting standards prevalent in Australia. Moreover, it is the accountability of the directors to evaluate the capability of the organisation to continue functioning in going concern basis while preparing the financial statements.
In accordance with the annual report of Wesfarmers Limited in 2018, it is evident that the auditor, Ernst & Young, has not failed to include any material aspects or information having material collision on the financial reporting of the organisation. All information is disclosed and explained properly by the auditor of Wesfarmers regarding the material factors that might have adverse impact on the business operations.
References:
Becker, L.L., Stead, J.G. and Stead, W.E., 2016. Sustainability assurance: a strategic opportunity for CPA firms. Management Accounting Quarterly, 17(3), p.29.
Bédard, J. and Courteau, L., 2015. Benefits and costs of auditor’s assurance: Evidence from the review of quarterly financial statements. Contemporary Accounting Research, 32(1), pp.308-335.
Bradbury, M.E., Raftery, A. and Scott, T., 2018. Knowledge spillover from other assurance services. Journal of Contemporary Accounting & Economics, 14(1), pp.52-64.
Carey, P.J., 2015. External accountants’ business advice and SME performance. Pacific Accounting Review, 27(2), pp.166-188.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hardy, C.A., 2014. The messy matters of continuous assurance: Findings from exploratory research in Australia. Journal of Information Systems, 28(2), pp.357-377.
Hay, D., Stewart, J. and Botica Redmayne, N., 2017. The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting Review, 27(4), pp.457-479.
Iyer, N. and Samociuk, M., 2016. Fraud and corruption: Prevention and detection. Routledge.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
McKee, D., 2015. New external audit report standards are game changing. Governance Directions, 67(4), p.222.
Simnett, R. and Huggins, A.L., 2015. Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), pp.29-53.
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.
Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting. Managerial Auditing Journal, 30(1), pp.80-111.
Stewart, J., Kent, P. and Routledge, J., 2015. The association between audit partner rotation and audit fees: Empirical evidence from the Australian market. Auditing: A Journal of Practice & Theory, 35(1), pp.181-197.
Wesfarmers.com.au., 2018. [online] Available at: https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?sfvrsn=4 [Accessed 20 Sep. 2018].
Wesfarmers.com.au., 2018. [online] Available at: https://www.wesfarmers.com.au/ [Accessed 20 Sep. 2018].
Zhou, S., Simnett, R. and Hoang, H., 2018. Evaluating Combined Assurance as a New Credibility Enhancement Technique. Auditing: A Journal of Practice and Theory, 21(7), pp.143-171.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
